Why do we need a Fiscal Centred Perspective on Welfare State Development?

By Michal Koreh (Assistant Professor, School of Social Work, University of Haifa) and Daniel Béland (Professor and Canada Research Chair in Public Policy, Johnson-Shoyama Graduate School of Public Policy)

Welfare state scholarship needs a fiscal centred perspective because focusing attention on the imperatives and interests related to the fiscal, revenue side of social programmes can shed new light on the historical and contemporary politics of social policy. This is particularly the case with programmes like social insurance that are directly involved in the extraction of revenues and that, in some countries, collect more revenues than personal income taxes.

In our recent Policy & Politics article titled ‘Reconsidering the Fiscal-Social Policy Nexus: The Case of Social Insurance’, we lay the foundations for such a fiscal-centred perspective. We bring together several bodies of theoretical literature situated beyond the conventional boundaries of welfare state research and combine their insights to suggest two interlocking claims. The first is that social insurance systems financed by payroll contributions can be used by state and non-state actors to advance their fiscal and economic goals beyond the financing of social benefits and services. The second claim is that, through mechanisms such as legitimacy production, institutional design, and coalition building, the design and management of social insurance contribution policies for such fiscal purposes can have substantial ramifications for the development of social programmes.

These claims run counter to accepted wisdom in the welfare state literature, which typically understands social insurance contributions as a way of covering the costs of income maintenance programmes. While welfare state theories differ in various respects they all tend to identify the benefit side of social policy as the driving force behind welfare state development, rather than its fiscal revenue side. Explanations are benefit driven in the sense that actors’ interests and motivations, including decommodification, risk aversion and enhancing the capacity of state bureaucracies, are framed in relation to the benefit/spending side of the welfare equation (Korpi, 1989; Mares, 2003). Our suggested fiscal perspective does not attempt to displace existing theories of welfare state development at the centre of this literature. Instead, its goal is to supplement them so that social policy scholars pay more attention to the fiscal side of the welfare state and its potential causal impact on social programming.

In this new article, using various historical and contemporary examples, we show that the motivation to introduce, expand, or restructure social programmes does not only concern decommodification, income redistribution, or the collective protection of social risks (the familiar driving suspects of social policy), but can also be related to the interests that are shaped by the fiscal and financial dimensions of these programmes. While social insurance contributions are generally earmarked for specific social insurance schemes, they can nevertheless create surpluses that are then invested in state bonds, economic enterprises, or financial markets. While these funds are due to be returned later (with interest), they can be used for a range of non-social goals, such as increasing industrial investment, injecting patient capital (i.e. long-term capital with no expectation of a quick profit) into financial markets, facilitating government spending, or facilitating tax decreases elsewhere in the budget.

Our article draws on the existing social policy literature to offer examples of countries in which fiscal imperatives have shaped welfare state development. For instance, as Philippe Manow suggests, in Germany during the late nineteenth century, the need to legitimize and facilitate the fiscal expansion of the federal state fostered the creation of the first modern social insurance schemes under Otto von Bismarck (Manow 2004). Half a century later, in the United States during the New Deal, powerful fiscal ideas and institutional factors justified the adoption of Old Age Insurance as part of the 1935 Social Security Act. This was the case in part because President Franklin Delano Roosevelt and his advisors believed that a fully-funded social insurance programme financed by payroll contributions would not place an undue, long-term fiscal burden on the federal government. Thirty years later in Canada, when the time came to create an earnings related pension system, the province of Quebec opted out of the Canada Pension Plan proposed by the federal government to create its own Quebec Pension Plan, which would offer similar benefits but funnel the money from the payroll contributions to a provincial trust fund, allowing pension surpluses to be invested in Quebec economy. In this context, fiscal, economic and nation-building objectives mesh to pave the ground for the creation of a provincial earnings-related pension programme that would also indirectly serve as a tool of regional economic development. These three classic historical examples suggest that our fiscal centred perspective draws attention to factors that are as old as the modern welfare state. Such examples also point to the fact that our fiscal centred perspective is grounded in rich historical and comparative analysis.

The significance of the revenue side of social programmes has recently come up in the study of restructuring processes and particularly in the field of pensions. There are an increasing number of studies that show that interests related to the control and management of pension capital have been central to the motivations behind these reforms and to their specific design. In France, Marek Naczyk has shown that the struggle over pension privatization and then over the institutional design of the old age scheme was basically a struggle over patient capital (Naczyk 2012). In post-communist Eastern Europe, Katharina Muller has shown that economic and financial interests such as channelling savings into productive investment and using the long-term nature of pension capital for developing and stabilizing emerging capital markets, were a major driver behind pension privatization (Muller 2002).

Beyond these historical and contemporary remarks, at a more general level, the theoretical inspiration for a fiscal centred perspective and its preliminary causal explanations draw on the fiscal sociology literature. This literature has long emphasized the causal importance of fiscal imperatives and revenue extraction for the development of the modern state. Authors such as Charles Tilly and Margaret Levi, both cited in our article, have argued that the state’s need for revenues can drive it to engage in exchange processes with citizens, commit to various political and civil rights, and engage in the provision of goods and services (Levi 1989; Tilly 1985). While we see fiscal sociology as a major reference point for the development of a fiscal centred perspective, we argue that it cannot be applied mechanically. For such a perspective to contribute to the analysis of social insurance, several modifications to fiscal sociology must be made. This includes paying attention to the unique features of social insurance as a fiscal mechanism and taking into account how the specific institutional structure of social insurance affects its politics as a revenue extraction tool.

More specifically, future research could look into methodological and empirical issues related to the analysis of social insurance as a revenue-raising mechanism. For instance, using process tracing methods, it would be helpful to explore the translation of fiscal ideas and imperatives into social programmes over time and across jurisdictions. Overall, more systematic comparative research is needed to improve our understanding of this crucial yet understudied topic.

Michal Koreh is an assistant professor at the School of Social Work, Faculty of Social Welfare and Health Sciences, University of Haifa.

Daniel Béland is Professor and Canada Research Chair in Public Policy at the Johnson-Shoyama Graduate School of Public Policy and President of the Research Committee 19 of the International Sociological Association